Go Ahead, Strategically Default On Your Underwater Mortgage

“Homeowners should be walking away in droves. But they aren’t. And it’s not because the financial costs of foreclosure outweigh the benefits. One can have a good credit rating again–meaning above 660–within two years after a foreclosure.” That’s the conclusion reached by a law professor who’s written a paper about strategic default, which is when you elect to walk away from an underwater mortgage because you stand to lose more money trying to keep it than if you cut your losses immediately. The problem is, lots of people think it’s the wrong thing to do, because individuals are supposed to play by different rules than the companies they do business with.

Over at Metafilter, there’s a lengthy discussion about the paper and the concept of assymetrical norms, which is what it sounds like–one party in a transaction is expected to follow a stricter set of rules than the other, and punished by accusations of immorality or poor ethics–usually by peers–if they don’t. The law professor, Brent T. White of the University of Arizona, says this is why too many homeowners don’t act in their own economic best interests. This is the abstract of his paper, “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis”:

“Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.”

The Washington Post talked to White about his argument, specifically to ask how he can say strategically defaulting might be financially healthier for a homeowner. White notes that some states protect a homeowner’s assets from a lender, while in other states a savvy homeowner might be able to find cracks in the mortgage agreement that open loopholes of protection. (A Loophole of Protection will add +5 to a saving throw against a Deed Troll, as you probably know.)

People on the banking side of things are not impressed by this argument. The funny thing, though, is they don’t provide any good arguments for why such assymetry of norms is a fair and just way to do business; instead they just reinforce White’s basic argument by pointing out how horrible strategic defaulters are:

“Borrowers who walk away from their mortgage obligations face serious consequences” including severely depressed credit scores for extended periods, Fannie Mae spokesman Brian Faith said. In addition, he said, “there’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

Lewis Ranieri, chief executive of several major mortgage-related companies and one of the pioneers of the mortgage securities industry, called White’s entire argument “incredibly irresponsible and misinformed.” Not only is the professor urging consumers to break legally binding contracts, Ranieri said, but if large numbers of them did so it would send home mortgage rates soaring and “tear apart the very basis” upon which mortgage lending rests — the understanding that borrowers will honor their commitments and pay back the money they borrowed.

And yet… if a business finds itself in an untenable financial position, it is considered smart to put a stop to things immediately and, hopefully, go on to fight another day. If only individuals had the same freedom in the marketplace.

Comments

Edit Your Comment

Before taking this advice and making a huge life-altering decision, people might consider that banks are not acting at all similarly to how they used to act. It used to be pretty easy to recover from big negatives on your credit report, but banks are being a lot more restrictive with their lending since last year.

true, but if you read the article, you would have seen that professor white advocates that you make all your big purchases now, knowing that you won’t be able to obtain credit for a couple of years. this also helps you re-establish credit, b/c you will continue to have on-time payments long after your bank forecloses & c/o’s the loan.

Exactly, getting a foreclosure on your record is going to hurt you when going to rent. Since you aren’t going to have your own home anymore, that is something you need to be aware of.

That is what I dislike about credit reports and scores. They don’t give reasonable explanation of why a person made a particular decision. They also don’t explain much when an account is closed either.

I didn’t read the linked article, but what happens if someone stops paying, goes into foreclosure, and in 12 months FICO changes their scoring method to give more weighting to foreclosures? Or what about lenders who DON’T use the standard FICO score, but rather a custom score? Your FICO might be 660, but the bank you want a new mortgage from is going to see “foreclosure”.

What happens if you default on your $400,000 mortgage (home worth $300,000), and then two years from now you want to buy a similar home and prices have increased to $500,000. Unlikely, but you’re now priced out of a market you were in.

Lot’s of ifs and not a lot of sure things, especially if you are currently able to pay your mortgage. If you’re struggling and blowing through retirement funds to pay the bills, then maybe it makes sense.

Simple, you don’t buy that $500K house for it is way over priced. You rent it, let the sucker owning that house pay the mortgage, tax and maintenance cost, which is higher than the rental. and when the economy goes up and house price surface again (won’t happen in a short time, so you have a lot of time), your credit will be restored, and your will have a good amount of saving to make a big down-payment (don’t forget that when you strategically default the mortgage, you’ve saved $100K immediately, which is 20% of a $500K house), and you can use this to negotiate for a more favorable mortgage.

It is not even a question of likelihood. It is happening in many places in US, especially those areas hit hard by house value drop. So if you are underwater, chances are that you can find good rental deal near your place.

FICO most likely won’t give more weight to foreclosures – if anything, they’ll give less. think about it – as more people are foreclosed on, the curve shifts (yes, FICO scores are curved), & it becomes less important.

but, you have a point. many lenders – especially small banks, CUs & the like, simply will not give a home loan to someone that has a foreclosure on their record (can you blame them?) so don’t expect to get into a new house in 2-4 years. think more like 6-10.

I’ll be honest. I’m doing this right now. Last year I got divorced and the agreement was to split the mortgage till the house was sold. It never did. I never even got a low ball offer. She refused to pay anymore and I couldn’t afford it by myself. I’m on month 6 of no payments and I haven’t even been served with the foreclosure notice. The phone calls from Chase even stopped. When they do file I have a lawyer ready to file motion after motion to keep me in the house longer. I figure at this rate I could live rent free at least another 12 months. I pay all of my other bills and yeah my credit will go to shit but I’ll have a cash stockpile. Quite frankly after this experience I could care less about ever owning a home again.

I’m dealing with Chase on a pending short sale. Well, “I’m dealing with” because they refuse to contact me back. We have supplied all the paperwork (that proves I can’t afford the house on my own, the house I’ve been trying to sell for 7 years), sent them the offer, etc. They just refuse to answer a phone call/email. If I wasn’t so anal about my credit I would have let it go long ago.. but screw them. I’ve been stockpiling cash, too.

I’m sorry, but I think this makes you a terrible person. You’re not making payments, continuing to live in the house and “stockpiling” cash. What gives you the right to live there without paying a dime? If you want to stop paying the mortgage, fine. Move the f&*k out. I think it’s reprehensible that you continue to live there while not making payments when you clearly could be making some effort to pay (given that you’re stockpiling cash and can afford a lawyer to file motion after motion to keep you in the house). You’re no better than a squatter and you’re part of what’s wrong with this country. You want something for nothing and think that just because you had some bad luck you should get a pass.

For Esquire, individuals are always wrong, unless they are extremely wealthy, and corporations are always right. Expecting empathy, or even the ability to see both sides of an issue, is simply setting yourself up for disappointment.

What would Judge Posner say about the concept of efficient breach as between two companies, Company A that is selling widgets at $1 to another over a term of 5 years, where two years into the contract, a new Company B offers the same widgets for $.50. Is the company behaving “morally reprehensibly” if they sign a new contract with company B and breach the old supply contract?

Because until they foreclose, he is liable for maintaining the property and any damage to it. Now I’d say he was an a$$ if he moved out and stripped the fittings (plumbing / lighting fixtures) or trashed the place. Right now he’s still on the hook for all of that so staying is the only way to protect his rear-end from the city AND the mortgage holder.

Oh because I forgot. In many sections foreclosures have halted because the banks don’t want to deal with the taxes on the property. All of a sudden the person whom thought they were being evicted (and voluntarily left before the final court filing) found themselves with tax bills (which included city maintenance of the yards because the grass got too long or somesuch) because they were still the owners.

Until the banks files the final paperwork with the court, and yes they would have to do that even if you voluntarily left, the homeowner is on the hook to the city and the mortgage company.

The bank would probably offer to renegotiate and try to keep him in the house. They need all the paying customers they can get. :P

But really.. it’s -his house-. Even though he doesn’t own it in full, he owns a partial share and he owns the “responsibility” for it, as others have pointed out. That, to me, covers the moral side.

But even still, if you’re just against him breaching his contract because it’s not morally right, that’s one thing. But if you’re against it even a tiny bit because it’s illegal, you’re being hypocritical. It’s his legal right to live in his house until they foreclose and evict him.

No, it’s not his “legal right” to occupy until they evict him. That’s like saying a fugitive is free to wander at large, until he’s arrested. Eviction is simply the remedy courts provide to end the physical posession by one who has no right to be there * before the time the evition process starts.* It is necessarily a retrospective determination. I.e., the eviction is NOT the time when you lose the right of posession, it’s the time when the law announces with finality that you’ve BEEN living there *without* the right to occupy it and now your removal can be effected by force.

I agree with you on the eviction part, but the house is _his_ until the bank forecloses. So it is his to stay in until the bank forecloses, then he should move out (unless the bank asks him to stay) and eviction is the remedy to force him to move out.

Oh come on, “esquire” has become a completely ubiquitous appelation amongst members of the bar. While it sounds stranglely like little Lord Fancypants to modern ears, it’s just a hold-over word that’s come to mean lawyer. Moreover, Esquire99’s completely right: squatting is the douchey move, regardless of the rationalizations offered.
The reality is, if any one of the commenters on this board had made the loan that was secured by the house, they’d be screaming bloody murder if the borrower just said “f. it” and “go ahead and evict me.” The only reason folks are okay with this stunt is because the lender is some big, bad corporate entity. Fine, that’s a position–but don’t pretend you’d feel the same way about Mr. squatter if the lender were, say, your own grandmother.

Inglix has it right in the comments below; Banks are still not responsible for their balance sheets, thanks to mark to market being suspended, so a tenant living in default is like having a free up-keeper in the home. Tenant wants to keep up appearances, banks don’t have to pay costs associated with foreclosure, or the maintenance costs of upkeeping an empty home. Have to keep the heat on to prevent pipes from bursting.

And it’s not reprehensible for the banks to make loans to individuals based on only verbal confirmation of income? The banks played the system in doing so knowing that the the Govt. was going to buy the loans from them. Here, they are the ones that “stockpiled” cash. How many of these banks raced to make loans (similar to how they gave credit cards to babies, dogs and cats in the 80’s and 90’s) knowing that the gravy train wasn’t/couldn’t last forever? They didn’t have to carry the loans on their books, so what did they care? Where is their moral judgement in doing what is good for the masses in those actions?

I’m sorry about your circumstances and think it’s the best decision you can make under those circumstances. I have some friends that had to do a very similar thing a few years ago.

My only advice in the matter is to rely less on keeping your cash in a bank account and use a safety deposit box for what cash you don’t actually keep in the house. If you keep a good amount in the house, use a fire safe. You would be surprised at how easy it is for creditors to wipe out your bank account. I’ve seen it happen to the aforementioned friends.

this post & the subsequent replies sum up the whole thing pretty well (especially the anger displayed at the concept of staying in the home without paying). BuddhaLite is acting like a rational party to the contract – he will remain in the home (albeit in default) until the lienholder seeks remedy for the default. he is not doing anything wrong at all.

& yet some of us scowl. where’s the scowling at the other party in this contract? they could have worked with BuddhaLite to remedy the situation without foreclosure (modification, short sale, etc.) or be more diligent in seeking remedy. yet they are not. & we’re expected to sympathize with them? why exactly? there’s no logic to that.

what’s good for the goose is good for the gander. if we as consumers are expected to uphold our side of these agreements b/c of some sort of unwritten principles of righteousness, then we also must expect the same from the lenders. therefore, in cases where an egregious breach of morals occurs (such as in this story –> http://consumerist.com/2009/11/judge-wipes-away-half-million-in-house-debt.html ), the lender would lose their rights to remedy altogether.

so can i assume that you agree with judge spinner’s decision to relieve the horoskis of their obligation in that case b/c the lender didn’t act morally?

that’s incorrect. the lender’s responsibility goes well beyond just funding a loan. if it were that simple, mortgage agreements would be a single page instead of 30+. both stories indicate a breach on behalf of the lender. in the first link, documents show that lenders were breaking the law when courting borrowers. that would be a breach – they did not enter into a contract in good faith. in the second link, they could not provide the borrower with an accurate statement of balance, which also could be considered a breach. accurate accounting is one of the responsibilities of the lender after the loan is funded.

if you are to argue that borrowers in both cases were morally required to uphold their end of the agreement, then you must also argue that lenders had a similar responsibility that they did not uphold. so what remedy is just in these cases?

A mortgage company short selling a home while a family is still in it and making payments on time and of the proper amount just because they live in a state where you don’t actually own the title to your home until it’s paid in full is the best decision they could make in these difficult times. (Or to file bankruptcy, or get a bailout, etc etc)

So why are they legally within their rights, and you’re not? Oh right, they write the contracts (including the loopholes), and it’s near impossible to buy a house without them.

In situations like this, it is the little guy vs. the big bad company, and unless you’re just that moral/ethical that you’re willing to financially sink yourself, you should feel free to play with the exact same tactics they use on you. All’s fair in love and war.

Banks might be more restrictive, but consumers are getting screwed and it isn’t that big a deal if you plan for it. Buy a new car and whatever else you need and then bail. GM did it, Chrysler did it and no one blinks. But the consumer who is taking it in the shorts is supposed to follow different rules.

The problem is that this *IS* the wrong thing to do. Someone who borrows money for a house should be responsible for paying for the house regardless of what happens to property prices or interest rates.Foreclosure should lead to bankruptcy if the person who borrowed cannot pay back the amount owed.

However the banks should be required to attempt to get the best price for any foreclosed house, selling via Realtor’s rather than on the steps of a court house.

This will help protect housing prices a bit, and also help protect the banks. And by protecting the banks, consumers will also be protected since the ones who are doing the right thing will be less in need of supporting those who cannot pay.

But the whole argument is why is it the right thing to do? Why are we supposed to hang on to our mortgage as hard as possible, when if we are a company in financial trouble, (lets use GM) we just shutter dozens of plants, lay off thousands and thousands of workers, drop all our obligations and contracts for pensions and health insurance, and do whatever is necessary for the business to survive another day… Why is one good, and the other bad? look at Charter communications (large cable company).. they are coming out of bankrupcty, getting BILLIONS of dollars of debt wiped away. Because they took on more then they could pay…

Obviously your argument implies that what, say, GM is doing, is the “Wrong” thing, otherwise, it wouldn’t be remarkable and you wouldn’t comment on it. So, if what GM is doing is “the wrong thing,” then advocating individual people to do the same is also “the wrong thing.”

We don’t need to get nihilistic and think that right and wrong is some relative concept when it comes to honoring contracts and agreements. What bad corporations (looking for bailouts, not paying their bills, etc) are doing *is wrong,* commenters and this blog say so almost every day… So when you advocate that people do the same, something that *you* obviously recognize as being wrong, and then start to question “What is wrong and right” you become nothing but a hypocrite.

I don’t see how anybody can bemoan the actions of a corporation, and then suggest that there is some ambiguous morality when a person does the same thing. You should only be in favor of both (ie, the irresponsibility of corporations AND the irresponsibility of individuals) or you should be against both.

No. The â€œrightâ€ thing to do is follow the mortgage agreement. Thatâ€™s the legal document that defines the obligations of the lender and the borrower.

To boil it all down, the vast majority of mortgages provide for two options: 1) You make the payments for the full term of the loan, or pay it off early, and the house is yours free and clear. 2) You donâ€™t make the payments, you lose your equity, and the house then belongs to the bank.

Thatâ€™s the deal. You agreed to it. So did the bank. You have the right to walk away from the house and face the consequences. Itâ€™s spelled out right in the contract.

Please explain to me why exercising rights that are clearly provided for in a contractual agreement is the wrong thing to do. Do you expect the bank to refrain from any actions that are allowed by the mortgage contract because they are â€œwrong?â€ I donâ€™t. Why place a higher moral burden on the borrower?

Companies voluntarily break contracts all the time. Heck, without several billions of taxpayer money, how many large banks would have broken their contracts?

Cry me a river about the whole “moral” issue. I think we would have been better off to nuke the Too Big To Fail institutions from orbit (the only way to be sure) and given those billions to the homeowners at that point.

So, trying futilely to hold on to your house and strip yourself of all other assets in the process is the right thing to do? To what end? What good does it do for anyone? The bank has a few thousand dollars more (but not the full “value” of the house) and you are now destitute. One more person who is financially shattered: that’s good for America.

Lead to bankruptcy? Huh? A mortgage is specifically the sort of deal that should NOT result in bankruptcy, unless there are extenuating circumstances, or you wish to use bankruptcy as a tool to keep your property (property in the general sense: anything you own).

Clue train coming through: a mortgage is a special kind of deal, wherein if you fail to pay, the lender can take what you borrowed for. As in, the thing you have a mortgage on is its own collateral, in a way. You are out the payment you’ve made, possibly additional fees, and possibly the property that is mortgaged. A mortgage is a kind of deal which ends, one way or another. It came to be popular specifically because of allowing the borrower this kind of power. Usually, it goes away in the form of someone else buying the property, but uh…trends change, eh?

Corporations and financial institutions acting in their own economic self-interest to the detriment of normal people = GOOD

Normal people acting in their own economic self-interest to the detriment of corporations and financial institutions = BAD

Considering that most of the people in this situation are people who should never have been given mortgages in the first place, an irresponsible action that many different entities share the blame for, it’s a little hard to sympathize with the banks.

No that isnt the point,What they are saying is walk away from the home that does not have enough value. If you bought a home for 200k and its now worth 100k, and you still owe 150k. Why keep paying for it? It isnt whether you can or cant pay it. Its a matter of if you should or shouldnt. The best bet financially is to quit paying, live rent and mortgage free for a while and take the savings into a new situation.

I totally agree with your sentiment. BUT – it’s not true that most of the people facing foreclosure shouldn’t have been given mortgages. Subprimes were given even to highly qualified borrowers because the YSPs were higher for the brokers. Prime borrowers default because they lost their jobs, got divorced, had expenses rise, whatever. There were certainly people that should not have been allowed to borrow, but the main issue is the quality of the loan products, not the quality of the people that bought the homes.

What the article doesn’t say is that for many homeowners, the house is not just an investment. It’s a home, a place where people live and to walk away from it is psychologically debilitating regardless of the financial consequences. After all, people are going to have to live somewhere and the cost of renting is often not cheaper than the cost of paying the mortgage.

From a moral standpoint, the banks have no standing. They were the ones who were so dazzled by dollar signs that they approved loans that never should have been made to people who had no business receiving those loans. Are some houses underwater? Sure, but some of the reason for that lies at the feet of the banks that made 100% mortgage loans on an inflated appraisal.

Strategic default is fine if you consider and are accepting of the consequences. Or when you really don’t have a choice.

exactly what i came here to say. why don’t i walk away from my (possibly) underwater “investment”? b/c it’s my f-ing home, dammit! now get off my porch before i get my long gun!

seriously though, sometimes i think for all the smarts people like professor white have, they often can’t see the forest for the trees. while i see his point, i don’t appreciate being called a “woodhead” b/c i don’t view everything i do thru my magic “what’s best for my bank account” prism. that’s what makes me better than a corporation. emotions do count.

True, but there many people out there, especially given the bubble, who should think about stuffing their emotions down a bit, since they’ve only had a few years to get attached, and it’s more being trained to think of a house the way they do than it is that the house is really that important.

“Rather, these emotional constraints are actively
cultivated by the government, the financial industry, and other
social control agents in order to induce individual homeowners to
act in ways that are against their own self interest, but which are -
wrongly this article contends – argued to be socially beneficial.”

If you’ve been in a house for awhile, and you like it, fine. If you’re struggling, but it’s your dream home, fine. If you can’t find better without exceptionally risky life changes (hours more of commute time, new job, etc.), fine.

If you found it, thought you could afford it (or genuinely could at the time), but can’t, but keep paying for reasons other than genuine attachment to the building or property, you aught to rethink your situation a bit, and look at how you are thinking about your situation, and look at the rational truth and fiction of what you are being told about your situation.

He’s not saying, “don’t value your home,” he’s saying, “you’re being conditioned to think irrationally about your situation, and are being guilt-tripped at every turn.” It’s not that everyone should be strategically defaulting, but that at least an order of magnitude more people should be than are. if you read the paper, you’ll see he specifically deals with such concerns that are beyond the economics of the house and mortgage itself (specifically, p. 15-18).

You are spot on. Just add that the inflating of home values for a profit only stand point was a major cause of the real estate bubble. There is alot of blame to go around on that subject. When homes became investment vehicles instead of where you raised your family it was the begining of the end for traditional home ownership. To many people who bought their homes has a place to raise their kids are now faced with ramifacations of the burst bubble and the resulting failing economy.

In my neighborhood, homes were selling for 600-700k and up a couple years ago. Now they are selling for 500-600k. And if you got a loan back then even with 20% down you could be paying 3000-3500 a month. Rents for some homes in the same neighborhood are 1600-2000/month. So walking away from an underwater home, you could move down the street to a rental and save 1500/month.

“Strategic Default” is simply exercising option #2 in your mortgage/trust deed paperwork, nothing more, nothing less. It’s not some moral issue…you see the financial benefit of withholding payment and a whole set of preplanned/prewritten series of events occurs.

You’re essentially trading 2 years of bad credit for $250,000 if you’re underwater on your primary home…that’s a trade I’ll gladly take. Savvy borrowers who know the law know that it would take 6 months to a year to evict you from the home, so you can save the cash and find a rental after that.

It’s ashamed people aren’t more educated about the paperwork they are signing and put too much emotion into making that house payment. Tons of people I’ve talked to were financially better off walking away.

I’m actually going to see about digging up the paperwork and read it a little more carefully this go around. Closing was a blur of “sign here, initial there, sign there, now walk across the street and sign that guy’s paper”. Plus, I was worried the seller was going to screw me out of some money that was worked into the contract (to cover his HOA arrears). Thanks for the tip.

This one is easy. Not even close. Irresponsible banks loaned too much money to a lot of irresponsible borrowers. Those borrowers (and some responsible ones) are doing exactly what banks are doing-namely , making decisions that benefit them in the here and now.This is business to them ,it should be business to us.

Now. You people that will write in and wail about boarded up houses dragging your property value down blah,blah,blah – you weren’t complaining when you could borrow the imaginary “equity” that was skyrocketing during the boom.Your house is not an investment that is quoted in the paper every day. If you bought it expecting to get rich ,you fell victim to the real estate industry’s marketing bullshit.Enjoy your home for what it is-shelter,not a 3 bedroom IRA

Actually, when our foreclosed-upon neighbors finally left, we were all somewhat relieved. (Although they had other issues.) But as they headed into foreclosure, they did less and less maintenance on the home. The bank secured it, winterized it, and sent a lawn service out a couple times a month. And sold it within, oh, 6 months or so of the initial eviction.

Now, these were bad neighbors who got foreclosed on (trash on the lawn, some illegal activities at the house, DCFS and SPCA both called), but the bank was not a bad “owner” while the home was empty. Nothing was boarded up, and the only sign it was a foreclosure was a notice in one of the front windows. It was unmolested until it sold, and the new owner began renovating and improving the property immediately. (And was able to buy it because the bank sold it so cheap, so that was exciting for him.)

I know there have been a couple of other foreclosures in my neighborhood, but not on my block, but I haven’t been able to pick out those houses just by walking or driving by. I don’t live in an area where property values ran up, so foreclosures have not been so thick on the ground — all the ones in my neighborhood there were extenuating circumstances that may have driven the family into foreclosure even in good times — but I can’t really complain about how the local banks have been handling them in my neighborhood.

You probably live in a nice neighborhood. I live in an ok neighborhood – lower income, but people care about appearances. The house across from me went into foreclosure, and although I felt bad for them (it happened because the guy got injured on the job, couldn’t work and couldn’t keep up with the payments) I was happy to see them leave because they were loud, had trash all over the place, were constantly fighting, drunk partiers would end up in our yard and ON OUR PORCH sometimes. It’s quieter and nicer there now. The trash is gone and there are no boards or other nasty security measures.

The foreclosed houses in the filthy rich towns around me are similar – you would never know something had happened. In the urban areas, though, there are boards, chains, overgrown lawns etc. The banks aren’t stupid. They know which homes need to be protected and which don’t. I lived in one of those bad neighborhoods, and left when there were just two families left on the entire block. The rest of the homes had been foreclosed or the tenants had been evicted. A few of those properties were trashed before the bank got there to seal the places up. Copper pipes gone, wiring gone, squatters/vandals having their way. The banks are going to have a hard enough time getting someone to invest in the north end of Hartford. And an even harder time when the place requires tens of thousands of dollars of repairs. It’s not so hard to sell a nice house in a nice part of Avon, Farmington, Canton etc. People jump at the deals, and boarding those places up would be a waste.

Too many home buyers bought ‘ an investment ‘ and not a house to live in . They want their cake and eat it too . At the sametime if making a business decision they have to decide if eating their losses and walking is the best thing to do .

I just wish many more were just as business like when they made the decision to buy .

That kind of thinking just irks me: I mean, the average increase in home value consistently ends up lower than officially stated inflation numbers, never mind real inflation, and that’s before any kind of furniture, appliances, and maintenance over the years comes in. Treating a house as an instant cash bag for if you ever need to move is cool, as is treating a mortgage as an investment to leverage (using equity, and so on), but as an investment to actually profit, it’s just silly. If you want a short-term profit, well, you should know that’s always a gamble.

I’m actually debating doing this right now. It goes against everything I’ve ever been taught, but damn, I can’t get help no matter how hard I try. My current job is 40% less than I was making before. My mortgage company told me that I make too much money to qualify. $.25/hr too much money to qualify for the loan modification program. I was transferred to another department, I could do X but that would screw me on my property taxes and they wouldn’t get paid. My credit score is too low for a refi PLUS it would add points to the mortgage which is an added cost of PMI.
So, I’ve been weighing the costs here. I could get lots of help if I was 6 months behind on my payments and honestly, I’m thinking that might be the way to deal with it right now. Because trying to get through everything in an honest and decent way, you know contributing to society and all that rot, is NOT getting me anywhere. Plus, there are a lot of nice places for rent right now, so hey, what’s the diff, right? Save the money I spend on mortgage payments for a nice deposit and a year lease somewhere.
I just don’t know if that’s the way to go…yet.

It’s a tough situation, though keep in mind that generally rentals also do a credit check. If I were renting to someone, I might think twice if that person had just defaulted on another financial obligation.

this is true, but you can often overcome a foreclosure by being honest, providing (other) solid credit references & maybe even offering to put a larger deposit upfront (cash on the barrellhead almost always wins over landlords).

keep in mind, as much as you don’t want to let the bank foreclose, if you really can’t afford the house, and a foreclosure within 6 months in inevitable anyway, be proactive about it. rather than waiting until the 11th hour, when you’ve spent your last dime, spend the money you were going to spend on your next two mortgage payments on a lawyer, or even just a little warchest in case your next landlord wants a bigger deposit due to your impending bad credit. also if you decide bankuptcy is a must, stop making your CC payments. the difference between defaulting on 10k of CC debt and 11k is not much, but that extra 1000 might get you through the day.

The debt solution ads seen on TV uses the default strategy. They advise you to stop making your credit card payments, ignore the debt collection phone calls, and then use them – for a fee – to negotiate and try to lower lower your balance and payments.

It is a very dangerous assumption to make that the bank will forgive you your deficiency. If you still owe more on you loan than what the bank can sell your house for, they still have the right to pursue action against you. So I guess this is a good idea if you want to lose your savings as well as your house! I have a hard time believing a professor wrote this very misleading article without taking into account people might have other assets for the bank to go after.

This is probably one of the first times I have entirely disagreed with consumerist’s point of view. What ever happened to the days where a man’s word bound him? Let alone his signature? So I should borrow a ton of money, get cash out, buy myself toys, and then just stop paying when it becomes inconvenient?

My in-laws are bailing on a mortgage. They refinanced many times during the boom, and they got a lot of cash out of it. Sure, a lot of it went back into the house, but a lot of it didn’t. They now have a mortgage that is almost twice the value of the house, and 4 times the amount of the original mortgage. I consider it outright theft and just plain dishonest.

I understand that sometimes people fall on hard times, and there are some inescapable instances where foreclosure is the only option. And that is exactly why it is there. But otherwise, for the most part, you dug your own hole. Now it’s time to dig yourself back out.

It’s been said many times that an eye for an eye makes the whole world blind. And all of these homeowners walking away from their mortgages to save some money are certainly contributing to blinding and crippling america.

Because banks and business seem to get carte blanche permission to do nasty things that’s in their financial interest, even if its wrong (morally, ethically, etc.). It seems there’s no moral code for them, but there is for us. It’s like fighting with one hand behind your back. Banks and businesses bail on contracts all the time and deal with the consequences. Or they just go to the government and get a bailout. Why should we be held to a higher standard?

Bottom Line: When banks start doing the “right thing,” we’ll do the same.

You sign a contract that gives you two choices to make. You pick choice #2 because it is mathematically correct. At every step you are bound to the terms of your contract. So where is the part where you are reneging on you word?

EXACTLY!!! I don’t understand why so many people on here claim that walking away is “Option #2″ in the mortgage docs. The fact the the documentation spells out an explicit remedy doesn’t make that an “option” that you get to invoke, like picking the flavor of your wedding cake. If you stop paying, you are in breach of your contract, not just picking another legitimate path.

You aren’t breaching the contract. You’re following it. It’s no different than a professional athlete deliberately committing a foul for strategic reasons, usually in the dying seconds of a close game. It’s not “breaking the rules” of hockey to tuck your stick across the other guy’s shins and yank him off his feet. It’s committing a penalty, and if for strategic reasons it maximizes your chances of winning the game to do so even with a 100% chance of being called for a penalty, you do it and do it without remorse.

Khe concept of the “deliberate foul” in the waning seconds of a basketball game is equally well understood, and even a great sportsman and gentleman like Larry Bird would commit one without compunction.

Voluntary default is a rule of the game. It’s bad enough we hold people to higher ethical standards than we hold corporations – now we want to hold them to stricter rules than we hold corporations?

You most certainly are breaching the contract. The contract says “I will pay $x per month.” If you don’t pay that, you are in breach. The contract just happens to spell out the precise remedy for breach.

I disagree, AlphaLackey. As a borrower, you agree to pay the terms of the mortgage. Default is not an option that is explicitly given to the borrower. It is an option given to the bank when the borrower doesn’t hold up their end of the contract. Many business contracts have clauses for early termination/separation, but that just isn’t so for mortgages. It is a penalty for breaking the rules.

I tend to look at it this way. If an athlete fouls at the end of the game to avoid getting scored on, regardless of whether you call it strategy or not, he clearly broke the rules of the game. In sports, you get a slap on the hand for breaking the rules. The “ethics” of sports don’t necessarily apply to real life. If we all just decided to break the rules when it was convenient, then regardless of whether it gives us short term gains, our society as a whole will suffer.

On a side note, is anyone else annoyed by how much replies get squished into the side of the screen after a couple responses?

You wrote: “It’s not “breaking the rules” of hockey to tuck your stick across the other guy’s shins and yank him off his feet.”

Why, yes, yes it is–that’s why it’s penalized. One more time: just becaue the penalty is spelled out beforehand does not mean that the action that precipitates the penalty is therefore “not breaking the rules.” The theory that a system of rules that prescribes a penalty for an act therefore legitimizes that act as “part of the game” is, well, insane.

Can it be strategically worth it to break a rule/ commit a crime/ breach a contract? Sure, but just because the penalty is spelled out doesn’t make the act any less a violation/crime/ breach.

However that may be, that’s the whole reason those penalties are in there. It might not be exactly the same, but businesses break contracts because they are no longer worth maintaining and the penalties outlined in the contract for breaking it works out better for the company than continuing to maintain the contract for the entire lifetime of the contract.

The whole thing here is that from a business/financial perspective, walking away might be the smart choice. It might not be the morally superior choice, but it isn’t illegal.

And banks breached their fiduciary responsibility in lending. This is why I use a credit union. I can tell you right now that, as of the latest meeting, my credit union has had almost zero foreclosures that were “preventable.” The credit union has worked out terms to keep people in their homes AND still make money. The difference being they are in the business of keeping their customers happy.

My parent’s neighbors are the best example. He lost his job at a mill and six months later so did she. He’s 5 years from being able to collect a 30 year pension without penalty and she’s 2 from a 25 without penalty. Now they have almost zero income (unemployment is tough to round out bills with) so they went to the credit union. They got their car and house mortgages adjusted to their income, with them required to go back in after 2 years and then 3 years after that, for readjustment. Of course the insurance must be paid and such. Still, they’re not worried about starving and / or losing their house.

Had banks worked like that, you’d see me have a LOT more pity for them. The credit union bent the loan(s) rather than have it break entirely. The banks would rather have the contract breach? F*ck’em. They know what’s in the contract.

It’s not theft when someone gives it to you. If they got cash out that means a bank gave them a HELOC.

Human nature being what it is, if a bank -which is supposedly run by smart people who know how to evaluate risk and underwrite loans- is basically giving away money, why be surprised when people take it?

Here’s a great plan for a married couple in this situation. Get a divorce, but just on paper, you don’t have to start hating the other person. She gets everything in the divorce, except the house. She buys a new one, he moves in with her and he defaults on the old house. His credit is ruined but who cares. Hers is fine. You could even work it out in the divorce so that he gives her his entire paycheck so the bank can’t garnish his wages. Of course, this requires A LOT of trust. I’m not a lawyer, but I think this might work. Any lawyers out there who can tell me if this will work?

By the way, this is exactly what GM did. New GM got all the assets, old GM got all the debt. Old GM defaulted.

Lenders like mine are now wise to the buy a new one and default on the old one tactic. Sorry, that loop hole is largely closed. If you move within so many miles of your current home we question why and there had better be a good reason or we deny the new loan.

Just like we were all smart investors 3 years ago, buying in an area ahead of the market and signing onto an ARM. Because we were going to be rich.

Uh huh.

If the chips are down and you have to contemplate doing this, that’s your issue. But I don’t like this “everybody out of the pool!” mentality by these idiots promoting doing this en masse. It fucks a lot of innocent people over.

Who are the innocent people? The banks that gave money to anyone with a pulse who asked for it? Maybe, but they already got their bailout for making bad decisions, we didn’t. We keep hearing about the moral or ethical component of these decisions, when the banks or big business get a free pass. “It’s just business,” they say. Fine, when it comes to these sorts of finanical decisions, I can play the same game.

Well, how about the homeowners still living on these streets, in these communities where a number of people have already defaulted? The people still living there there have seen their properties plummet. The abandoned, sometimes gutted houses are dangerous havens from crime and animals. The cities can’t collect enough tax revenue to provide basic services, compounding the problem.

Now, say we were to have another wave of “savvy” investors ready to do the same thing. It would make the above situation even worse.

I want to be clear: I’m drawing a distinction here between walking away from your mortgage because you have no other options, versus writing an article encouraging people to do so as a concerted, populist “fuck you” to the banks. For the former, you do what you have to do. The latter, though, is irresponsible and unacceptable.

And I’m pretty sure I didn’t advocate for any sort of populist “fuck you” to anyone. I’m talking about a narrow group of people who would be better off if they opted for strategic default instead of a slow, painful financial death on a home they can’t afford.

I actually disagree pretty strongly with the commenters here who seem to think it boils down to, “If companies can screw us, we can screw them!” It’s not that at all. It’s that consumers sometimes don’t take advantage of all of their options, because they’ve been trained to view them through a moral lens that makes some viable, value-neutral options look repellent.

Chris, I hope you and ARP didn’t take my strong words and position as personally directed at either of you. My energy was meant to be directed at the first article and its author. I’ll try to tone it down next time.

Nah, I was reacting to the few comments that seemed to misinterpret White’s argument as a call for widescale default in order to fight back against the man. The phrase “populist ‘fuck you'” seemed like a perfect description of that mindset.

The idea that someone would leave their home for the sole reason of ‘screwing’ a bank is laughable. That’s not a reason that anyone would do it. It just happens to be a side effect that we can collectively snigger at.

Exactly, you better be jobless, no meaningful employment in the near future as well, barely being able to put food on the table situation.

I knew of a family on Long Island who would over the course of 2-3 years max out their credit cards, buy new cars, ETC… and then claim bankruptcy, saying they couldn’t afford it anymore. No particular reason why they couldn’t, like losing their jobs or becoming disabled. Within a few years, they had credit cards again, vehicles, and the pattern would repeat.

And yet… if a business finds itself in an untenable financial position, it is considered smart to put a stop to things immediately and, hopefully, go on to fight another day. If only individuals had the same freedom in the marketplace.

Just being underwater on one’s mortgage doesn’t qualify as an “untenable financial position.” I think that those who are in “untenable” situations, i.e., can no longer afford their mortgate, are walking away.

That’s the thing with being classified as being underwater . It’s nothing but a financial OPINION or ANALYSIS of your mortgage . It is NOT a mandate to sell .

The car and credit card analogies are perfect . Or you could even use the collectable market – check out the bids or interest on those items on Ebay sometime . Do you want the item because you really want THE item or do you want ‘ an ‘ investment .

Exactly what Hrumph says — the moment you drive a car off of a lot, you are underwater on it, sometimes by as much as 20 – 30% of what you are paying. Does that mean that you should stop making payments? Drive the car for a few months and then push it into a ditch? No.

This is a consumer blog that tries to protect consumers. It is horrible consumer advice to advocate taking a loan and then simply not paying it because what you are paying for is not worth the price that you once paid for it.

The number 1 consumer rule: buy what you can afford
The number 2 consumer rule: pay what you owe.

Because of this religious obsession with maligning corporations, we’re somehow all forgetting the most basic rules of good consumer advice.

Being underwater is much about simply over paying for the house . I don’t think it’s just the ARMs that are causing the situation . The banks wanted quick easy money and the home buyers wanted flips & investments . The demand caused inflated prices . But it all goes back to did they want a place to live or a retirement fund .

Keep in mind that that 660 score is a barely attainable goal. That assumes that you still have multiple open, good lines of credit.

That foreclosure could also come back to haunt you on job/security applications, and in the rate you pay over the next 7-10 years (new mortgage, car loan, credit card. Even deposits for cell phones and rent could go up. Not saying a strategic default isnt a viable option

Telling the lender “I’m not making any more payments, here are the keys,” is a perfectly legitimate thing to do – it’s fully living up to the terms of the contract, which say make the payments, or lose the house. Attempting to live in the house for free, however, does violate the terms of the mortgage contract.

No, they both violate the terms of the contract. All mortgage contracts specify payment as a duty of the borrower–in all cases, not paying is a breach of the contract. That remains true whether you surrender the keys, or squat. Both have defaulted on the agreement. This “exercising Option #2″ nonsense is silly layman’s talk.

Also, it’s important to note that whether or not you live in a “non-recourse state” makes a huge difference here. In a non-recourse state (Cali is one), the first mortgage (second liens don’t qualify) is only secured by the property itself. You could be Bill Gates, and the lender couldn’t get anything out of you other than the house. In states where mortgages are recourse, the lender can come after you for the difference between the mortgage balance and what the house sold for, and try to get bank accounts, put liens on other property, garnish wages, etc.

You should see the 80 year old 2 bedroom 1 bath houses in my neighborhood in los angeles that used to sell for $1.2 million that are now on the market for $800,000.

People with that kind of money don’t want to live in little shacks. Those houses were never worth $1.2 million, they’re not worth $800,000 and they won’t ever be worth $1.2 million again. And I will bet you that for sure.

I agree with the idea that being underwater alone isn’t a reason to default.

If I were underwater, it wouldn’t matter to me as long as I could continue to make payments. I like my house. I’ve put a lot of work into it. The location is great. It would make no sense to leave. That would change if I lost my job or had to move – if I were underwater, walking away might make sense. But simply owing more than the house is worth isn’t reason enough to walk away.

Fortunately, I can’t imagine that I’d ever be underwater on my home. It was an estate property on the market for $150,000 last year, and I got it for $52,500 because it smelled really really bad. Before making an offer, we got a crime scene cleanup specialist to confirm the smell could be removed, and he was right when he told us we could get rid of it in a couple of days, but no other buyer could get over that smell!

I actually am in one of those crappy situations where my house is worth about 100k less then what I paid, at the peak of the market, so I have a high mortgage, no one wants to touch me for a refi.. what am I to do..

My biggest worry is not the credit hit, but rather the hit to my various clearances. I went through the process with a co worker, who does have a foreclosure in his past, we both went through the process for a particular gov entity, I got my waiver for having an existing clearance within 2 weeks to start work, and the clearance came through about 4 months later, my co worker, has no waiver, and is still going through the process.. it has been about a year now….

Foreclosures and bankruptcy’s negatively impact security clearances…

At one point, my wife and I were discussing possibly applying for a second mortgage to buy a house, that is much cheaper now, and would halve my monthly mortgage, and try to rent out my existing place, if that did not work, walk away from it… but thats just not going to happen.. as much as I would like.

I’m surprised, yet not surprised, that the consumerist tacitly advocates such bad advice for consumers just because the political undertones of not paying your mortgage outweigh the obvious benefit of paying your bills and honoring your contracts.

Regardless of whether liberal governments bail out corporate entities when they don’t pay their bills, individual homeowners have a contract to uphold and they should uphold it. If you agree to borrow money knowing that you have no intention to pay it back should you suffer financial misfortune, there’s another word for that, and it’s called “stealing.”

I don’t care if you’re an individual home “owner” or whether your a corporate powerhouse, if you do what this article suggests — what the consumerist seems to tacitly agree with — then you are nothing more than a selfish thief who does not feel any responsibility.

If the banks didn’t want to get screwed when someone walks out on a house that’s 100k under water, then they shouldn’t have issued 100% LTV non-recourse mortgages. Seriously, stuff like this is EXACTLY what big down payments are for. Hint: commercial non-recourse loans are rarely for more than 50-60% LTV.

Actually the bailout was initiated by Bush, so it was of a conservative genesis.

Funny, my company had a contract with a major auto-maker, that said they can’t canel early and defined the penalty if they did. Well, they cancelled early. Yet, this happens fairly often and no lighting bolt hit the CEO.

I think we get the short end of the stick when it comes to moral relativism: banks and large comapanies can do what they want and they immediately hide behind what they’re legally allowed to do and/or “shareholder value.” Don’t tell me for a second that most companies do the right thing out of the kindness of their hearts. It’s either because there’s a regulation or out of the fear of publicity. Which is why if you have a horrible disease that insurance won’t cover for some shady reason, you publicize it and magically, they reconsider. When it comes to our dealings with the banks, we should have the same attitude. So, it walking away is an option and the ramifications aren’t that great, why shouldn’t we have the same attitude.

Here’s another reason that some of us aren’t defaulting on our mortgage:

I can still afford my payments, and we bought this house to raise our child(ren) in.

Yes, I’m down significantly from the purchase price of the house. I’m probably even underwater, depending on what day you check and whose estimate you use for the value of the home. However we acknowledged that this might happen when we bought the house in 2006 (top of the market, yay!!).

But we bought the house to be in it long-term. We’re here for the schools (moving less than 8 miles from our last house put us into a much better school district), and we’re here for the neighborhood. We can still make our payments because we did the unthinkable and purchased our home on a 30-year-fixed, nothing has changed except that the “perceived value” of our neighborhood has rollercoastered around us.

Mathematically, taken strictly as an investment item, we would probably do better to default, rent (or live with the ‘rents), then buy again in a few years, but then we’d be raising our daughter (+ more?) away from the home we’ve built around her.

To all of those who are railing against “the stupid people that borrowed way more than they could and bought toys, blah, blah, blah,” and saying you got what you deserved for being stupid, you are making a gross error by painting with a brush far bigger than your intellect can handle.
There are certain parts of the country where the only mistake that homebuyers made was buying in the market where…they happened to live. Nothing more. Las Vegas, Phoenix, parts of Florida and California have had home prices drop by 50%+ from 2 years ago. You buy a house in places like those where the contrcution bubble was overly large and your house valued at $225,000 goes to around $90,000 over night. It’s no coincidence that the author of that paper was a professor from a university in Arizona. They’ve been slammed there and because of the housing glut there, housing prices in certain areas of Phoenix will take decades to recover prices.
In a case like that, if you’re too much of a goody-two-shoes to default on your loan, then the only alternative is to become your mortgage company’s slave. I’m know there are a lot out there who would place other aspects of their lives in higher regard than a misplaced sense of honor toward the bank. Truth is, people who think it’s immoral to default on the loan just don’t understand the document they signed.

That’s speculative. On the flip, banks survive by writing loans. I predict conditions will be such that banks will have to write to people with foreclosures in their past, because there will be so many of those people out there. Banks need to lend money.

What free lunch? You’re describing the market correcting itself. The rates should have been higher, the requirements should have been stricter, and so on and so forth. So, as the future comes closer, they will become that, with a bit of added aggressiveness that will tame a bit as it all evens out.

It will have an effect on the market. It should have an effect on the market. That is, in the long run, a good thing.

Fico is a crock, good credit never helped me the way everyone says it will. Gave my condo back a couple of decades ago, score came back and still, good credit never helped me the way everyone says it will. Cut your losses live to eat another day, ’cause it’s something that will go away. Don’t live in fear, save yourself, not the banks.

Suppose you’re a regular homeowner. You have good credit, get a mortgage for a decent house at a decent rate, make your payments. You’re going to live in the house until you move elsewhere, be it for a new job, retirement, etc, at which point you expect to sell the house for a good enough price to at least break even, or even make a profit. This is how it used to be.

But now, you owe more on your house than your house is worth because the value has plummeted.

Why has the value plummeted? Because so many people with sub-prime loans defaulted on their mortgages and went into foreclosure, and the housing market became saturated with houses the banks wanted to sell to recover some of their losses.

Why did they default? Because after the initial easy terms of their mortgages expired, they were unable to make the new, higher payments, because they didn’t have enough income. They shouldn’t have been able to get the mortgage in the first place. But mortgage brokers gave it to them anyway.

Why did they give it to them? Because there were no more people who qualified for mortgages, and the banks wanted to give mortgages, and the brokers wanted to collect fees for finding people to take out those mortgages.

Why did banks want to give more mortgages? So they could packaged them into collateralized debt obligations and sell them to investors, and make more money.

This chain of greed continues, but the bank is a major link in it. They’re one of the reasons the value of your home is so low. They’re one of the entities that did this to you. They get bailed out, and even if you manage to sell your house you’ll still owe them money which they expect you to pay back. Is that right?

In this case if you don’t want to take the TIME to see if can work it out and meet all your obligations as a business or home buyer don’t make the sale . Or take the time fo think about all the consequences of taking on a big financial endevour .

As ” a ” strategy or tactic I don’t want to take that option away from anyone . I understand things or circumstances can change but I don’t think a lot of home buyers or businesses THINK about that period . And somebody usually winds up crying poor mouth after the fact .

It’s not just people who bought a McMansion on a $28,000 a year income with an ARM mortgage that are in trouble. Normal, financially responsible people with good credit who bought their homes 5 or even 10 years ago are affected by this. That’s a long period of time for someone to think ahead, and I doubt anyone that far back could imagine this situation happening. You’re making your payments like clockwork, and very quickly your house is worth less than you owe.

You know who didn’t think ahead or look at consequences? The people who issued mortgages to buyers with no down payment or reliable income source. The banks who foreclosed when those mortgages defaulted, and then flooded the housing market with homes instead of working with the homeowners so they could continue paying, or at the very least, renting out the homes. The saturation of the housing market made values crash, which is why people walk away from mortgages. They shot themselves in the foot. Otherwise responsible people, who would have eventually paid off their mortgages, abandon them. They may be like rats abandoning a sinking ship, but the banks and mortgage brokers were the ones who steered this ship into the iceberg. They’re the captains. Let them go down with the ship.

“there’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

That? From the mouth of a Fannie Mae spokesperson, of all people? I mean, it would make sense coming from almost anyone else, but very few people in the mortgage industry would serve themselves well by bringing up the havoc that they and their colleagues have wreaked on neighborhoods.

I’ve been locked out of this account since the changeover, but this ridiculous quote motivated me to fix the account with a quickness. How dare he?

Arg. I don’t understand how we’re (by which I mean “y’all’re” — I’m still over here poking my revolving debt dragon with a pocketknife) going to get out of this mire as long as smarmy jackwipes like that are allowed to do the talking.

“And yet… if a business finds itself in an untenable financial position, it is considered smart to put a stop to things immediately and, hopefully, go on to fight another day. If only individuals had the same freedom in the marketplace. “

Flawed logic, plenty of businesses have their assets temporarily valued below what they paid for them..and if millions of businesses did what Consumerist recommends people would be screaming bloody murder and posting about how bad this is for the consumer on this very website.

The banks made lots of money by processing lots of mortgages during the boom, quite a number of people who lied on their applications will get a better house (after working out a plan with their lender) than the could have afforded otherwise.

If you bought within your budget and make your payments, you’re the one getting screwed. It’s like that in most things – retail stores include the cost of shrink in their prices, you pay more for health care because of all of the people who don’t have insurance or can’t afford the treatment they need & your taxes pay for many services that you never use.

I don’t blame people for looking out for their own self-interest, but really, if everyone who was underwater didn’t pay, the whole system would collapse. So some will leave their homes, and after their credit is better in a few years, they’ll buy a new place. Others will tough it out, and make their payments, even if their house price will take many, many years to get back to break even.

Just another way where the responsible person is screwed. What can you do? The system can’t support itself if it was “fair” to everyone.

“Fannie Mae spokesman Brian Faith said. In addition, he said, “there’s a moral dimension to this as homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community.”

May 24, 2006: Federal regulators issued a blistering report about mortgage giant Fannie Mae on Tuesday, alleging accounting manipulation aimed at lining executives’ pockets and lying to investors about smooth growth in profits and earnings. The government-sponsored mortgage company was fined $400 million and agreed to limit its growth. – Washington Post

—–

December 18, 2006: U.S. regulators filed 101 civil charges against chief executive Franklin Raines; chief financial officer J. Timothy Howard; and the former controller Leanne G. Spencer. The three are accused of manipulating Fannie Mae earnings to maximize their bonuses. The lawsuit sought to recoup more than $115 million in bonus payments, collectively accrued by the trio from 1998â€“2004, and about $100 million in penalties for their involvement in the accounting scandal. – Wikipedia

—–

June 2008: The Wall Street Journal reported that two former CEOs of Fannie Mae, James A. Johnson and Franklin Raines had received loans below market rate from Countrywide Financial. Fannie Mae was the biggest buyer of Countrywide’s mortgages. – Wikipedia

People like Brian Faith do not care about your neighborhoods, community, and especially you. They just want to enslave you to pay for their extravagant bonuses and salaries. If you were smart you would just walk away. Everybody started off with nothing and you can start from the bottom up again. That is true capitalism, something these bailout companies do not understand and at the expense of your hard earned money.

I love how people here are acting like a person’s word has been worth something recently. A person’s word or promise hasn’t been worth anything since the 1970s. Honor has been long gone and so has decency and respect. If any of those actually were in any real quantities, we wouldn’t be in this finacial mess in the first place. I think if you has to choose between paying a ridiculous house payment and paying your utlities, food, meds, school, etc.. I’d dump the house payment since evertually I’m going to have to anyways. Better to save some money now than end up going into bankruptcy later. If they foreclose then I move out into someplace affordable. A home is not a building but the people in it.

I’m just confused at all the bull shit people are spewing here. The same people that criticize the bailouts of wall street firms are just fine with people bailing on their underwater mortgages. There’s no such thing as a free lunch. Whenever these losers dump their mortgages, someone else is picking up the tag. Banks aren’t just going to shrug and say “Oh well.”, that money will be made up elsewhere, either through higher rates, fees, or heck straight cash from the taxpayers. People need to brush up on personal responsibility before this country goes down the tubes. If you’re bailing on your commitments simply because at present time (depressed housing market) your home is worth less than what you paid for it, sure it may be the financially best thing for you to do, but for everyone else that actually has a sense of decency and moral responsibility, you’re screwing them over.

I agree with many that bank screwed themselves by irresponsible lending, but the borrower has the same amount of responsibility for the situation. You have to know if you can afford something and not just take the word of the mortgage company. When you make a poor decision there are consequences (or at least there is supposed to be, we don’t exactly teach this to kids if my wife’s experience as a teacher here in Texas is any indicator).

My cousin’s house was foreclosed on. I had no sympathy for him because he didn’t make an effort to fix his situation. Getting laid of sucks, and sometimes you can’t find a comparable job. When this happens you don’t sit at home and bitch, you get off your ass and find a lessor job (if that means McDonald’s or Wal-Mart, then so be it) and try to make ends meet. If that job isn’t enough, you make an effort and find a second such job. Those jobs are out there (especially right now) you just have to decide how much you care about your word and repaying your debts.

The problem I have with strategic default is that it makes things worse for those of us who didn’t borrow excessively in the first place. Mortgages in the past have been priced with the expectation that people wouldn’t walk away. In other words, they were priced as a standard loan, because the expectation was that people would do anything to not lose their house.

If we start looking at mortgages as basically the equivalent of buying stock on margin – where we keep the profits if we win but walk away if we lose – mortgages will be a lot more expensive, and for those of us who look at our houses as primarily a place to live and not a short-term investment, we will pay more so that we can do something we wouldn’t do anyway.

“homeowners who simply abandon their homes contribute to the destabilization of their neighborhood and community”

The sheer magnitude of what Wall Street banks/financial institutions did, did more to destabilize “their” neighborhood and community and not to mention the rest of the â…“ of the planet that isn’t covered by water than defaulting homeowners could ever do.

Ask yourself why are they defaulting and you will see it’s because of all the subprime, interest only, no down payment, rate re-setting loans that homeowners were pressured and tricked and lied to to take out.

I have been disappointed with the posts on the consumerist lately. First we have someone lying to return a TV without penalty, and now we have advocating of ‘Strategic foreclosure’. This is not what I saw consumerist being about.

Honestly, I’ve always seen consumerist as a watchdog, that attempts to get corporations to be a good citizen, either by shaming them into ‘doing what is right’ or in egregious cases by pointing the consumer in the direction of the attorney general, small claims court, or to applicable laws. I would much rather consumerist focus on ways to get mortgage lenders to agree to permanent modifications, or even temporary modifications to make the mortgage more affordable, not to encourage walking away.

The provisions in place protect us all, in case of job loss, divorce, medical emergency, transfer, or some other unforeseen consequences. Strategic default is not that. Personally I feel strategic default is bad for *all* consumers. It continues to lower prices in the area, leaving homes vacant etc. And if consumers start using no recourse defaults strategically, exactly how long do you think it will be before banks can convince lawmakers that no recourse defaults are the problem.

Just as we encourage companies to be good corporate citizens, in order to protect all consumers; we should encourage people to be good consumer citizens, in order to protect all consumers. We shouldn’t balance asymmetrical norms by sinking to their level, we should attempt to get them to rise to our norms, and encourage the companies that do.

Reading a lot of these comments is really tiresome. It’s obvious that a lot of people here have no idea just how predatory and one-sided a lot of the mortgages that were being peddled by various shysters/banks really were. I find it interesting how quickly people will turn around and say “Well they should have known better, why did they sign a contract that had such terrible terms?” and yet now that someone is saying “Look at the contract and consider if breaking it and accepting the consequences might not be the best possible financial move for you” the same people seem to be bitching about how that’s immoral and wrong.

Look, it’s either business and the banks/businesses do what’s in their best financial interest (which they doover and over and over) and we do too or it’s not and they have to think about morality and right vs wrong and so do we.

Quite frankly I’m fed up with this notion that we not only have to keep track of our P’s and Q’s with regard to all of our mortgages, contracts, EULAs, TOS’s, FICO’s, etc… but we have to always do only what is deemed “right” and “moral” by people who often represent the very businesses and banks that are making money hand over fist through various fees (remember Delta’s fee to pay a fee?) and one-sided agreements.

Most people here seem to misunderstand the point of this article, which is that the government and corporations are deploying the shame argument against individuals in order to control them. Of course itâ€™s unethical for any person or entity to renege on a contract, but in the real world businesses are not held to any moral standard about breaches of contract. We rail against â€œwelfare queensâ€ as lazy and immoral, but corporations take government welfare every day and they get to hold their heads up. This kind of shaming behavior shows up in all kinds of ways: Donâ€™t ask coworkers how much they make. Why not? Why shouldnâ€™t I know what other people at my company make for doing the same job? Because itâ€™s â€œrudeâ€? Applying social mores to business dealingsâ€”and make no mistake, real estate contracts and your job are business dealings, no matter how warm and fuzzy either one may make you feelâ€”is a way to manipulate the other party. And, finally, perhaps the most important point: Why would anyone accept pronouncements on morality and ethics from corporations and government?

Right on. Everyone claiming moral arguments against this is missing the fact that businesses run their economics like a business and therefore, we as consumers have the right to do so as well. Sure, you do have factors such as sentimentality that go into a purchase as large as a home. But when it comes down to it, why should you have to operate your own finances in any manner other than the one MOST ADVANTAGEOUS TO YOU? Consider yourself a business and do whatever makes the most financial sense to keep your business operating. You better believe the companies on the other side of these mortgages do.

Let’s start by acknowledging that banks/corporations have no sense of morality, propriety, honor, nationalism, respect, community, social responsibility or fairness. Nor are they required by any law in any jurisdiction to have any of these qualities. The act of incorporating a business was created (some would say) specifically to get around all these restrictions. And, don’t let their spin managers and marketing companies fool you.

But this list of qualities are used by corporations to control the behavior of their flocks (customers). Corporations freely manipulate governments, unions, armies, police and any other tool they can use to help ensure that when it comes time to sheer their flock, very few of the sheep escape.

This means that for most transactions people work with one set of rules and corporations with nearly no rules. Not equitable.

So when someone suggests that you should play by the rules of the corporations, keeping your bottom line as the primary concern, then go for it.

This really is a case were the entity you are dealing with really isn’t human.

So, here is my situation. My partner and I bought a house in 2006. It was brand new (we had it built) and valued at $325,000 at the time. We put around $30,000 down and mortgaged the rest. We could easily afford it when we applied for the mortgage. Money was not an issue. My partner was working in the mortgage industry when it imploded. Now, he is currently unemployed, still looking for a job, and I do not make enough money to make the payments on our house. It is currently only worth about $265,000. I don’t particularly care that we owe more than it’s worth, and I don’t want to move either, but if we can’t afford it, then we really have no choice but to let the mortgage company foreclose on it. The mortgage company has gone above and beyond to help us. They told us that they don’t want our house. They want us to stay as long as possible, but that doesn’t change the fact that we can’t afford the payments. At some point they will have to foreclose.

It has come to the point where we are now behind on all of our utility payments, his car is weeks away from being repocessed. In order to squeeze one more mortgage payment out of my quickly draining bank account, we chose to not pay the water and electric bills for a few months. I even borrowed money against my 401k thinking that it would get us by for a few months until he got a job. Well, 8 months later, we are now 6 months behind on the mortgage, he still doesn’t have a job, and I am paying $300 a month to pay back the loan from my 401k. Last week I came home to find the water had been shut off. Does it make sense to keep the house at this point? We will live in the house and maintain it until the mortgage company tells us to go.

I don’t want to walk away from it. It’s in a good location. Its value will increase in time, I am sure of it. But once you start getting your water turned off, then the electricity, then it’s time to bail. I have never in my life not paid back something, whether it was a credit card, loan, or money borrowed from a friend. It makes me sick just thinking about walking away from our beautiful home, and having that foreclosure on my credit report

Your situation sounds more like a default than a strategic default. You’re defaulting because your situation has changed and you cannot afford the bills. You’re not defaulting because it’s cheaper than staying in the home.

Many credit-worthy people are underwater on their mortgages because lenders made loans to folks who were NOT credit-worthy. That practice drove up demand and prices that are now not sustainable due to the inevitable default on the bad loans.

The lenders broke their contract with the public by making bad loans. Why do folks with good credit, but mortgages that are double their home’s value have a higher level of moral obligation to continue to pay on those loans? From a purely economic standpoint, depending on where you live (some regions have experienced greater value drops) your credit score will recover before you will ever see the value of your home approximate the current mortgage.

Continuing to pay on a 30 year mortgage could mean you are ready for social security before you will have a deed to the property that is still worth less than you paid for it. Don’t be guilted into doing something stupid.

Continuing to pay on a house that will never be worth what you owe on it OR choosing to walk away are both life-altering.

My wife and I have had zero defaults ever and never intended to. My credit score when I checked it about 2 months ago was 740 and my wife’s was 720. We both have great paying jobs and are well above the median for the area and live reasonably within our means. We plan on having children in the next year or two and 4 years ago we (maybe foolishly) bought our first house, a 2 bed 1.5 bath condo in a nice, established community in North East Central Florida. We bought for $150k and now, a 3 bed 2.5 bath 6 units away has been on forclosure for 2 years and is now slashed to $49k. The “Obama Plan” (not using that as a political statement, I just don’t care to look up the real name), does not apply to us because we make too much and we have a condo.
About a year and a half ago we got some major leaks in the ceiling and called our association to have them fix it (it’s their responsibility and we are not allowed to hire our own people to work on the exterior). Someone came out, went on the roof, and when they cam back down said all would be fine. Since then, we have repeated this process exactly 11 times. We are responsible for any damage inside the home and our insurance won’t cover it because the leak came through the roof which is the associations “fault” so we have spent approx: $12k in repairs to fix what the leaks have destroyed.
About 5 months ago I discovered mold inside one of the walls where water had leaked in from the leaking roof and that was the straw that broke the camels back. I looked into buying another home and renting this one out but if the mold caused medical problems for the tenants, we could be legally liable. I won’t raise children in this house and I can’t afford two mortgages.
We made the decision to work with a lawyer to strategically default and in order to save ourselves undue financial burden, we are filing a chapter 13. We are acting now because if we wait too long we will also be held responsible for taxes on any possible “forgiven” amount of the deficiency. This was not our first choice, believe me. But for our families financial security(and health) This was the best decision for us. This is more about living a life than worrying about doing what is right in someone else’s eyes. We payed interest the entire time we have lived here (infact, as you all know, most of the payments we made in since we have owned have gone straight to interest) which indicates risk the mortgage company took on in writing our loan. I feel zero sorrow for them or what we are doing and we look forward to moving into our new rental in two months.

This is not about morals, it’s about doing what is right in the long run for your financial security and your families well being and it is all perfectly legal.

What I don’t understand is…when you get your car repossessed, you are liable for the difference between the auction price, and what you owe. So if you owe 10k on a car, and it sells for 5k, you still owe the bank 5k.

So apparently if you walk away from a mortgage where you owe 100k, and the house is worth 75k, you aren’t responsible for the 25k if the bank takes the house back and resells it?

So I’m only on page 12 of 54, but this paragraph sums up this entire case to me, in regards to a professional couple who bought a California home for $550K, no money down and a 6.5% interest rate. The market then collapses, and their home value goes from $560K to $180K, with a comparable mortgage payment (theirs is $4300/month) being $1200/month:

“Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity â€“ assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.”

I understand the moral indignation. I am also very offended by this concept…but I think that some folks are missing the professor’s point. He is simply stating that walking away is most likely to be advantageous from a financial perspective to certain upside down homeowners. Whether or not they can afford the mortgage and whether or not they should have ever applied for it is not relevant to that point.

Morals? Not being considered here…and that shouldn’t be a surpsie since he is a professor of law (shower if you got ‘em).

Is it right? No. Are you screwing the rest of us if you do it? To some degree, yes. Should you do it? Well, that depends on you…but let’s set morals aside for a moment and consider just the following purely pragmatic consequences:

– That improvement to your FICO score is not guaranteed…especially if you have been slipping on other obligations, did not have stellar credit in the past, or have also been living in the home without paying the mortgage for some time.

- Even if you get a 660 FICO down the road, that’s still a pretty poor score in the new economy.

- FICO improvement or not, you may find your bank canceling your credit card…and may find it very difficult to get another…outside of pre-paid cards at 7-11.

- Have fun trying to get approved to move into a decent apartment, most of which run credit reports. Ditto getting utilities, a cell phone, a car loan, etc.

- Your job may or may not be affected (security clearance, etc)…but future jobs probably will be…unless you punch a clock. Many potential employers routinely run credit checks on candidates as a measure of reliability and character.

- These consequences may also adversely affect your children and other loved ones.

So yeah, perhaps the guy in the educational ivory tower doesn’t have all the answers…even if you are willing to check your morals at the door.

In the paper (and I’m only 19 pages in), he addresses this. First, you could secure a home to rent prior to defaulting. Secondly, he mentions that anyone doing this must be prepared for bad credit for a number of years, and that planning to walk away from a home potentially requires years of preparation ahead of time.

As to job security clearances and FICO scores: according to a recent report from Deutsche Bank, the number of underwater mortgages is predicted to be a majority of American mortgages by 2011, so even if a minority of those people walked away, that’s still potentially millions of Americans walking away from mortgages. Banks can’t afford to lose millions of creditors, or at least I wouldn’t think so.

This is the hypothetical savings(?) for a professional couple who bought a house during the housing boom for $550,000 ($4300/month) with no down payment and a 6.5% interest rate only to have the market tank, bringing their home value to 180,000 ($1200/month):

“Assuming they intend to stay in their home ten years, Sam and Chris would save approximately $340,000 by walking away, including a monthly savings of at least $1700 on rent verses mortgage payments, even after factoring in the mortgage interest tax reduction. The financial gain for Sam and Chris from walking away would be even more substantial if they took their monthly savings and put it into an investment account. If they stay in their home on the other hand, it will take Sam and Chris over 60 years just to recover their equity â€“ assuming, of course, that they live that long, the market in Salinas has indeed hit bottom, and their home appreciates at the historical appreciation rate of 3.5%.” (Emphasis mine)

Sure, they may get labelled as morally terrible, but they aren’t ruined for lifeby a situation that wasn’t theirs to control from the beginning. Nor does this seem like a couple that was trying to live an excessive lifestyle.

I tried to post this twice, but it must have been too long. On page 12 of the paper, he mentions that a couple that bought a $550K ($4300/month, no down payment, 6.5% interest) house in Salinas, CA which promptly tanked in value to $180K (1200/month), could save $340,000 and 60 years worth of rebuilding equity if they walked away, assuming a value of $180K and an appreciation value of 3.5% (per year, I assume).

While they may be “morally reprehensible,” no one could fault them for the strategy involved. This move could be the deciding factor if they have a family or not. As the paper states, their bills, plus the $4300 house payment, has them just breaking even. If they took the money that they would be paying on interest and put it into an investment account, then they could begin to gain back their losses.

This doesn’t sound like the tale of a couple buying a house far outside their means; a $550K house in Salinas, CA seems on the low side (from homes.com) in the first place. Secondly, if they moved to a market with lower living expenses, they would have to pay everything involved in relocation, possible months without a job, and possible jobs with lower incomes (not to mention possible underemployment).

I stopped paying for 6 months. Then the next thing you know, I get a loan modification in the mail lowering my payments in half and dropping my interest rates almost below 5%. And no, it’s not an Interest payment only, They refinanced my mortgage for free.

Would a strategic default be a suitable strategy for credit card or home lien debt too?

I took out a lien to pay for some new siding on my house, and the lien came with 12 months no payments and no interest. Half way through the 12 month period, I lost my job and although I’m back working again I’m barely able to make ends meet, especially since the credit card interest rates have shot up. It’s got to the point where I can pay one or the other.

I had considered taking money out of a IRA to pay for the credit card debt, but a strategic default is an interesting option, if it would work.

I just wonder if people have thought about the tax consequences of walking away from their mortgages… I realize that federally one can avoid the tax cost of doing this (but not so much in a lot of states. In other words, some of the defaulted amount is considered income, therefore taxable). However, have people realized they’ll lose that nice tax deduction for mortgage interest? So their tax bill will go up. Therefore I ask the people who are doing this, especially those who can continue paying their mortgages but want out because they don’t want to throw their money away: You don’t think paying high taxes throwing your money away?